The Limited Partnership (LP) business entity type is an interesting one and is useful in the right situation. To compare and contrast, an LP is valuable because it offers many of the same tax planning benefits as a general partnership or LLC, but also many of the same limited liability protections as a corporation.
This post is part of our series on business entity types. Also see: What is an Limited Liability Company and Is the C-Corporation Business Entity right for you?
In a limited partnership, one partner is designated as the general partner. This partner is tasked with the management responsibilities of the entity. It’s assumed that all other owners, the limited partners, are solely investors who defer management of the entity to the general partner.
An LP provides liability protection to its limited partners but not its general partner. Because of this, often the entity is structured with an additional subsidiary entity (such as an LLC or S-Corp) for the general partner to use for added liability protection. A CPA can assist with structuring your entities in a manner to achieve your desired objectives.
Pros of a Limited Partnership
1. Flow-Through taxation (no double tax, as with C-Corporations)
2. Limited partners receive liability protection
3. Tremendous flexibility in type of owners, capitalization, allocations, etc.
Cons of Limited Partnerships
1. Some person must have unlimited liability, although this can be mitigated by using an entity with liability protection as the general partner
2. If such an entity is used, a second tax return is required
3. Annual franchise tax applies in many states (the amount varies, in California it’s $800)
In many cases, LPs have been replaced by LLCs as an entity of choice. Also, note that sometimes LPs are used in certain states that subject LLCs to higher franchise taxes.
If you think an LP would be the best fit for your business, talk to an advisor. It’s a unique entity that works well for various situations. Be sure you know your desired level of liability protection and tax treatment before you choose this type.
By: Sarah Moore, Manager at WHH
